The Doctrine of Public Policy in Canadian Contract Law

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36 I Annual Review of Civil Litigation actually applied the notional severance remedy in order to preserve the validity of an employee restrictive covenant which was deemed overly broad by reason of its application to the "Metropolitan City of Vancouver."' 92 In light of ACSand KRG, there is now a legitimate argument that the Transport spectrum approach to the consequences of statutory illegality applies to all contracts which are presumptively void for having contravened public policy.193 Where a court finds that a contract is unenforceable in its entirety, a party who has transferred benefits under the agreement has traditionally been required to establish an exception to the ex turpi causa doctrine in order to obtain restitution. Such exceptions include: .(1) where the party claiming for return of property is less at fault; (2) where the claimant 'repents' before the illegal contract is performed; and (3) where the claimant has an independent right to recover (for example, a situation where recovery in tort might be possible despite an illegal contract). 194 192 At paras. 57-62 of KRG, Chiasson J.A. stated that "[i]n this case, the real difficulty arises from the parties' agreement to the geographic reach of the restrictive covenant as the `Metropolitan City of Vancouver'. To strike the word 'metropolitan' would not reflect the obvious intention of the parties. They clearly intended a geographic reach that included the City of Vancouver and something more. The 'blue pencil' approach would distort that intention.. . There is no fixed, recognized meaning for the phrase 'Metropolitan City of Vancouver'. The task at hand is to construe that word to attempt to give effect to the intentions of the parties and, if necessary, to proceed by way of notional severance. .. in view of the clear direction of the Supreme Court of Canada that it is permissible to use notional severance to attempt to give effect to the substance of an agreement and to avoid having that substance subverted by an unfortunate choice of language, 1 would construe 'Metropolitan City of Vancouver' to prevent Mr. Shafron from competing in the City of Vancouver and municipalities directly contiguous to it. Geographically, I would include the City of Vancouver, the University of British Columbia Endowment Lands, Richmond and Burnaby. . . By reading down the phrase `Metropolitan City of Vancouver' to an area consistent with the need to protect KRG Western's business, an area that likely was in the reasonable contemplation of the parties when they made their agreement, the substance of their bargain is respected and enforced". 193 This approach appears to have some academic support, at least with respect to contracts in restraint of trade: see Jacob S. Ziegel, "Is Notional Severance the Right Solution for Section 347's Ills" (2005) 42 Can. Bus. L. J. 282 at 287-288. A flexible approach to the consequences of public policy violations may also be found in s. 178 of the Restatement of the Law, Second, Contracts (St. Paul, Minn.: American Law Institute, 1981), and ss. 7 and 8 of the New Zealand Illegal Contracts Act, 1970 (N.Z.), 1970/129. 194 Still v. Minister of National Revenue (1997), [19981 1 P.C. 549, [1997] F.C.J. No. 1622 (C.A.) at para. 24. There are additional exceptions to the ex turpi causa rule, including: (a) where the contract is made illegal by statute in the interests of a class of persons which includes the plaintiff; (b) where the plaintiff was induced to enter into the contract by fraud or duress; and (c) mistake: see Lapointe v. Messier (1914), 49 S.C.R. 271, 1914 CarswellQue 5 at paras. 48-50; and Vandekerhove v. Litchfield (1993), 84 B.C.L.R. (2d) 252, [1993] B.C.J. No. 1355 (S.C.), reversed on other grounds (1995), 1 B.C.L.R. (3d) 70 (C.A.), leave to appeal refused (1995), 126 D.L.R. (4th) vii (note), [1995] S.C.C.A. No. 131 (S.C.C.) at para. 59 [QL].
The Doctrine of Public Policy in Canadian Contract Law 137 However, as with severance, judicial approaches to the availability of restitution in the case of contracts contrary to public policy would appear to be changing.'95 In Tri Level Claims Consultant Ltd. v. Koliniotis,' 96 the Ontario Court of Appeal permitted the respondent paralegal business, which had provided services under a contingency fee agreement that was declared unenforceable on the basis of champerty, to recover the cost of those services through a quantum meruit claim. In doing so, the Court criticized the rigour of the traditional rule which absolutely prohibited the recovery of benefits conferred under an illegal contract.197 V. RETHINKING THE DOCTRINE Although there are many different theories which seek to explain the nature of the public policy doctrine, nearly all may be described as falling into one of three main lines of thought.'" The most primitive, which we shall refer to as, the positivist theory, is a response to the twin criticisms that public policy 195 This change is also reflected in the approach to restitution in the context of contracts which are invalid by reason of statutory illegality: see, e.g., Kilroy v. A OK Payday Loans Inc., 2007 BCCA 231 (C.A.) at paras. 22-23, where the Court held that the Transport factors relating to the spectrum approach also applied to the question of whether an illegal contract could serve as a juristic reason in an unjust enrichment claim. 196 (sub nom. Koliniotis v. Tri Level Claims Consultant Ltd.) (2005), 201 O.A.C. 282, [2005] O.J. No. 3381 (C.A.) [Koliniotis]. 197 Ibid. at paras. 36-39. At para. 40, the Court stated that "several factors demonstrate that an absolute bar on quantum meruit recovery creates an injustice that is unacceptable when considered in light of the public policy informing the statutory prohibition against champertous agreements. As noted, that policy is to protect the administration of justice from abuse. In the case before us, the contingency fee agreement was created in fair circumstances, as both parties were fully aware of what they bargained for. Any imbalance of power was remedied by giving the potentially vulnerable party time to consult with others. There is no evidence to suggest that the respondent engaged in sharp or dishonest practice in advancing the appellant's claim, nor that the respondent was in a conflict of interest with the appellant. . . [T]here is not sufficient 'moral turpitude' to justify denying the respondent any payment whatsoever for the work that was performed. In this regard, it is significant that it is not suggested that the respondent knew that a paralegal contingency fee agreement was illegal. To the contrary, it seems that contingency fee agreements were an accepted practice. We therefore conclude that the principle of quantum meruit can be applied in the circumstances." For a recent case in which the court denied the plaintiff an ability to recover benefits paid under a contract contrary to public policy on the basis of factors similar to those considered in Koliniotis (namely, that the plaintiff insisted on the inclusion of the objectionable term in the contract, and was not coerced into executing the same via duress or unconscionable conduct), see Pay v. Kaboly-Zadeh, 2006 BCSC 925 at paras. 145 and 153. 198 The reader should note that the within discussion of the various models of public policy is at best an outline. Those in 'search of a more robust exegesis should consult Lloyd, supra note 11, and John Bell, Policy Arguments in Judicial Decisions (Oxford: The Clarendon Press, 1983) [Bell].
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